3. Capital Budgeting

Capital Rationing — Quiz

Test your understanding of capital rationing with 5 practice questions.

Practice Questions

Question 1

Which of the following capital budgeting techniques is most suitable for ranking projects under capital rationing when projects are independent and divisible?

Question 2

A company has a capital budget of $$ \$90,000 $. It is evaluating three independent projects: Project A requires $ \$30,000 $ and has a Profitability Index (PI) of $ 1.4 $. Project B requires $ \$40,000 $ and has a PI of $ 1.2 $. Project C requires $ \$50,000 $ and has a PI of $ 1.3 $$. If projects are indivisible, which combination of projects should the company choose to maximize value within its budget?

Question 3

In the context of capital rationing, what is the primary limitation of using the Net Present Value (NPV) criterion alone when comparing projects of different sizes?

Question 4

Which of the following is a key assumption when using the Profitability Index (PI) for project selection under capital rationing?

Question 5

A company has a capital budget of $$ \$80,000 $. It is evaluating two projects: Project X with an initial investment of $ \$50,000 $ and an NPV of $ \$20,000 $, and Project Y with an initial investment of $ \$40,000 $ and an NPV of $ \$15,000 $$. If projects are divisible, how should the company allocate its capital to maximize value?